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My Chinese dangerous move: from FXI to GCH, from old to new China. March 30, 2006

Posted by deminvest in etf, funds, investment.
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Just a few days ago I told you that we can be at the same time proletarians home and capitalists in China. Well as I wrote that, I bought the largest and most common ETF for China it is called iShares FTSE Xinhua China 25, better known by its ticker: FXI.

Only two weeks later (and a hefty 4% gain) I decided to switch on a smaller, much riskier but extremely interesting pick: Greater China Fund Inc. ticker: GCH.

I did that because FXI seems the past of China and GCH the future. Also, to be honest, you all know my worker's weakness: I love dividends because they come to me without having to work. Well GCH yields 6 % cash!

Let's go back for a second to FXI. What's wrong with FXI? This fund, its boosters say, is a great way for small investors to get broad exposure to China with one simple, low-cost trade. I can't argue with FXI's cost or simplicity. And since FXI has risen nearly 20% year-to-date, I can't argue with its performance. But there is a but… Please take a look on http://www.ishares.com . There you will find the 20 companies that are part of that fund. Now use Google to find each one of them.

You will find state owned banks, loaded with bad debt because of their well known habit of lending big money to friends of Chinese politicians… You will find oil companies which are benefiting of high oil prices, but are still huge bad managed government owned giants. You will find a great telecom, which will definitely benefit of the fastest growing cell phone market, but still relies mainly on old-fashioned landline companies, which are not a safe beach in Skype's times.

CGH is free to invest and choose the best Chinese companies. Of course their job brings costs that we, the people, must pay. But, since I am not able to figure out how good a Chinese company is, I don't mind paying someone to avoid picking shares of a Shanghai bank overloaded with bad debt, just because it is bigger and is part of the index of 25 biggest Chinese banks.

 

Comments»

1. superg52 - April 5, 2006

in my opinion, it was a good move:
I made the same but with Templeton Dragon Fund (TDF)

2. deminvest - April 6, 2006

Thank you superg52. I am quite happy with my move GCH is already up 5,37% in a week.

I am now comparing your Templeton Dragon Fund (TDF) with my Greater China Fund Inc. (CGH) on the best resource for this kind of stuff:
http://www.etfconnect.com/select/fundPages/global.asp?MFID=12497
http://www.etfconnect.com/select/fundPages/global.asp?MFID=7963

TDF Current Div. Yield (on share price) 1.19%
CGH Current Div. Yield (on share price) 6.07%

Since I like high yield stocks. Specially in China where accounting standards may be a bit cloudy, high dividends payed in cash can be a hint that earnings may be real.

TDF Management Fees 1.52%
GCH Management Fees 2.09%

my gch seems to have a bit more expensive fees, but they are still offset by better dividend yields

your TDF seems to have more Taiwan, whyle mine has more Hong Kong. Since I am interested in China, I do prefer Hong Kong.

My GCH seems more constructions oriented, your TDF seems more food oriented.

Well mainly for the dividend yield reason and for the fact that GCH is more China oriented, I will stick to it and will not switch to TDF, unless of course you help me find good reasons to do the switch.

3. deminvest - April 13, 2006

11.57% up in a few days: not bad this GCH!

4. Carlana Martin - May 15, 2006

I bought TDF too a few weeks back. I was very happy with the earnings until the end of last week!
Apart from the increase in interest rates in US, what else is going on?
Shouldn’t a decrease in the value of the dollar help the chinese & Taiwan markets?

Any insight would be greatly appreciated. I am new at world-wide investment….

5. deminvest - May 16, 2006

A decrease in the value of the dollar compared to the Yuan hurts a little bit Chinese companies. It makes Chinese produced goods more expensive and American produced goods les expensive, giving a little advantage to American companies.

I will try to explain with an example:
imagine that yesterday you could trade a Yuan for a dollar. A Chinese produced car costing 6000 Yuan would be sold in USA for 6000 Dollars. Now today the dollar weakens. Today in my example you need 2 Dollars to buy 1 Yuan.
If you still want to buy the Chinese car costing 6000 Yuan, you have to pocket 12000 Dollars, but that is too much for a Chinese car, and you will buy an American car which has not changed its price in Dollars!

For this reason Chinese government is accused to keep artificially low the value of Yuan: they want to give an unfair advantage to Chinese companies exporting to western markets.

Going back to Martin’s investment, Dollar value only weakened very slightly, so it will not hurt very much Chinese exporters. In my opinion value of TDF went down for 2 reasons:

1) Chinese companies have greater opportunities to grow, but also greater risks connected to all emerging countries that depend on foreign markets import for their growth. As a general rule when you will see US and European stocks go down fast for 2 day like it happened last Thursday and Friday, you will at the same time see emerging markets stock prices plunge much faster. At the same time when Wall Street posts good gains, you will see emerging markets skyrocket much faster.
In my opinion the 2 bad days on Wall Street Thursday and Friday are the main reason for TDF to lose value.

2) It is not the slight weakening of the Dollar which can hurt Chinese companies, but if Chinese government accepts US government request to let markets fix freely Yuan’s value, that could really lead the Yuan to become much stronger and make it harder for Chinese companies to export.

Personally I will not sell my Chinese Stocks, because I think they will start their rise soon again. I still prefer CGH over TDF, but they are very similar because they both invest on China.

Chinese economy is still the strongest and fastest growing in the world, and little temporary problems cannot stop it. But that is my opinion of a simple proletarian investor… If you want more authoritative answer, you may go to read what “Wall Street gurus” write… They only problem you will find is that each guru has a different opinion…
Good luck! Let the force be with you companion:-)

6. Carlana Martin - May 16, 2006

Thank you very much, I understand what you are saying.

I really like your site, I know how hard it is to plunge into so much information and try to find something worth buying. I spend around 2 to 3 hours of my free time trying to do so.

Thanks for sharing this information.

7. deminvest - May 17, 2006

Martin, thank you for your appreciation. I not a Wall Street guru, but just like you, I do my best to find information and share ideas which can be useful for us small investors.

You are very wellcome to post your thoughts here anytime as comments, or if you want to submit some of your ideas to this blog, I will be happy to add you as author and allow you to publish easily.

Let the force be with us 🙂

8. Democratic Investments by the people for the people » GCH: bullish on stock markets, I recharge on Greater China Fund which seems a bargain now - May 23, 2006

[…] 1) On 03/30/2006 I bought 700 Greater china fund GCH at a price of $ 17.72 spending a total of $ 12.404. […]

9. Bill Kelly - July 23, 2006

Does anyone have any thoughts on FXI vs GCH ?

10. deminvest - July 24, 2006

GCH is still better. FXI is overloaded with badly managed, corrupt state owned companies that can’t survive forever.


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